A recession threatening the world’s second-biggest economic
bloc, along with efforts to reduce debt across Europe, is
exacerbating the financial risks. Stable or falling birthrates,
plus rising life expectancies, are adding to pressures, with the
proportion of economic output devoted to spending on retirement
benefits projected to rise by a quarter to 14 percent by 2060,
according to the ECB report.

Ageing Populations

Increased retirement ages and lower benefits must be part
of any package to hold the 17-nation euro area together,
according to analysts, including Fergal McGuinness, the Zurich-
based head of Marsh & McLennan Cos.’s Mercer’s pensions
consulting unit for central and eastern Europe.

Europe has the highest proportion of people aged over 60 of
any region in the world, and that is forecast to rise to almost
35 percent by 2050 from 22 percent in 2009, according to a
report from the United Nations. That compares with a global
estimate of 22 percent by 2050, up from 11 percent in 2009.

The number of people aged over 65 in the 34 countries in
the Organization for Economic Cooperation and Development is
forecast to more than quadruple to 350 million in 2050 from 85
million in 1970. Life expectancy in Europe is increasing at the
rate of five hours a day, according to Charles Cowling, managing
director of JLT Pension Capital Strategies Ltd. in London.

In so-called developed countries, the average lifespan will
reach almost 83 by 2050, up from about 75 in 2009, the UN said.

Cutting Costs

Governments and companies have taken steps to reduce future
costs with policy makers having increased retirement ages in
countries, including France, Germany, Greece, Italy and the U.K.

“Irrespective of whether you’re inside or outside the euro
or anything else, raising retirement ages is one of the
structural reforms that all of Europe has to do,” Kirkegaard
said. “The crisis has forced them to address this. This is
actually a positive thing in many ways.”

By 2060, the average French pension benefit will be 48
percent of the national average wage, compared with 63 percent
now, said Stefan Moog, a researcher at Freiburg University in
Freiburg, Germany.

Pension managers and governments are relying on economic
growth to safeguard the promises they make. If the euro zone
grows too slowly to bolster public and private coffers, the
retirement plans may become unaffordable, according to Mercer’s
McGuinness.

Benefits’ Squeeze

“The amount of money countries are going to spend on
social security and long-term care is going to go up,”
McGuinness said in an interview. “Governments with more
generous social-security systems will have difficulty affording
them. They will have to recognize these costs will impact their
ability to reduce borrowings.”

State pension obligations in France and Germany are three
times the size of their economies, according to data compiled by
Mercer. It’s more sustainable in France than Germany because of
France’s higher birthrate.

Last year, there were 4.2 people of working age for every
pensioner in France. The ratio will fall to 1.9 by 2050,
according to a report by Economist magazine in March. In
Germany, the proportion will decline to 1.6 from 4.1 in the same
period.

“That is going to put a lot of pressure on Germany’s
ability to meet their promises,” McGuinness said. “What they
are more likely to do is cut back benefits. Governments face a
lot of longevity risks.”

Add to Risks

Private pension funds are under pressure too with benchmark
euro-area interest rates at the lowest level since the 13-year-
old currency was introduced. Low rates mean pension plans have
to hold more assets to back their long-term payout projections.

Unless growth returns, fund managers will effectively be
forced to take on more risk, said Phil Suttle, chief economist
of the Washington-based Institute of International Finance.

“That creates problems because they all head into sectors
that seem a great idea now, and then they blow up, whether it’s
commodities or equities or whatever,” Suttle said. “You’re
going to intensify the boom-bust cycle.”

The growing doubts facing the euro area is another planning
hurdle as companies reconsider investment strategies amid
concerns that Greece may default on its debt and spark a broader
euro breakup.

The implied probability of one country leaving the euro by
the end of 2013 fell to 49 percent on Jan. 10 from 51 percent a
week earlier, based on wagers at InTrade.com, an Internet
betting market. The probability of one country departing by the
end of 2014 is 59 percent.

Rates Benefit

Pension plans in countries such as Greece or Portugal may
benefit from exiting the euro as higher interest rates that
would likely accompany a return to their national currencies
would cut the cost of liabilities, while assets invested abroad
would almost certainly gain in value, according to Mercer, a
unit of Marsh & McLennan Cos.

PensionDanmark, Denmark’s seventh-largest pension fund by
assets, sold all its German government bonds last year, Chief
Executive Officer Torben Mogen Pedersen told reporters in
Copenhagen yesterday.

“Our government debt investments are all in Scandinavian
non-euro countries,” Pedersen said. “We think 2012 will be a
very hard year for European investors.”

In Britain, which has refused to join the euro,
occupational pension funds have moved the risk of ensuring
adequate retirement income to the employee from the employer in
the past decade to curb pension-fund shortfalls.

Funding Gap

Unfunded public-sector U.K. pension obligations across
1,500 public bodies totaled 1 trillion pounds ($1.57 trillion)
in March 2010, the Treasury said Nov. 29 in the first set of
audited Whole of Government Accounts. That compares with a total
of 808 billion pounds of outstanding U.K. government bonds and
accounts for 90 percent of all public-sector pension
liabilities.

Royal Dutch Shell Plc (RDSA), Europe’s largest oil company, was
the last member of the benchmark FTSE 100 Index to close its
defined-benefit pension plan to new entrants when it made the
decision last month to do so. The company plans to introduce a
fund for new employees next year that makes them responsible for
ensuring they have enough to live on in old age.

Governments may have to follow the same path for their own
employees as well as increasing the retirement age to at least
70 and possibly 75 to make the pensions affordable, Cowling
wrote in an article published in July by Public Service Europe.